The New India Assurance Company, a century old public sector general insurance company, is the largest general insurance company in India in terms of net worth, domestic gross direct premium, profit after tax and number of branches as of and for FY2017. The operations of the company are spread across 29 states and seven Union Territories in India and across 28 other countries globally through a number of international branches, agency offices and Subsidiaries including a desk at Lloyd's, London.

G. Srinivasan is Chairman and Managing Director of the company, who has over 37 years of experience in the general insurance industry in India and internationally and has been in the role of chairman for a decade in the industry.

Despite increasing competition from private players, the company has maintained market leadership in the general insurance industry in India and has been leaders in all segments except crop insurance for last five straight years. For FY2017, the company garnered the market share in fire insurance at 19.1% of segments industry gross direct premium, engineering 21.9%, aviation 29.6%, liability 18.2%, marine 21%, motor 15.1% and health insurance 18.4% and the company has been the market leader in each such product segment.

The company has developed a pan-India branch network of 2452 offices end June 2017. The company has also developed an expansive multi-channel distribution network that includes individual and corporate agents, brokers, bancassurance partners and other intermediaries, as well as direct sales and sales through online channels. Its distribution network in India included 68,389 individual agents and 16 corporate agents, bancassurance arrangements with 25 banks in India, and a large number of OEM and automotive dealer arrangements through agent and broker network end June 2017.

The gross written premium of the company has increased at a CAGR of 15% from Rs 13200 crore in FY2013 to Rs 23230 crore in FY2017. The company has paid 125% dividend for FY2017 and has proposed a dividend of 155% for FY2018. The company has been funding its operations for more than 40 years without any external capital infusion.

The investment portfolio of the company including cash and bank balances stood at Rs 63112 crore end June 2017, which has growth at a CAGR of 11% between FY2013 and FY2017. The investment portfolio generated yield on average investments (including cash and bank balances) of 8.08% for FY2017. The book value of investment portfolio has increased at a CAGR of 11% from Rs 23239 crore end March 2013 to Rs 36355 crore end March 2017, which rose to Rs 37952 crore end June 2017.

The company commands a robust financial position, with a solvency ratio 2.27x end June 2017, compared to the IRDAI prescribed control level requirement of 1.50x. The operating expense ratio of the company was 20.40% in FY2017, the lowest among the top 10 multi-product insurers in India. The company has been rated A-(Excellent) by AM Best Company since 2007 and rated AAA/Stable by CRISIL since 2014.

The incurred claim ratio (ratio of net incurred claims to net earned premium) for the company was stable around 85% for three years to FY2015, which increased to 87% in FY2016 and further inched up to 92.2% in FY2017, in line with the industry trend. The incurred claim ratio for the industry increased from 81.7% in FY2015 to 85.1% in FY2016 and is estimated to have increased by a further two percentage points in FY2017, as per CRISIL report. However, the company has improved the ratio to 87.2% in Q1FY2018.

The Offer and the Objects

The initial public offer (IPO) is to collect around Rs 9600 crore at the upper band of the issue price of Rs 800 per share (face value Rs 5 per share) and Rs 9240 crore at the lower price band of Rs 770 per equity share. The issue consists of a fresh issue of 2.40 crore shares totaling up to Rs 1920 crore at the upper price band and offer for sale of 9.60 crore shares totaling up to Rs 7680 crore at the upper price band of Rs 800 per share. The offer for sale comprises 9.60 crore shares by the Union government.

The offer includes reservation of up to Rs 0.36 crore for eligible employees. There is discount of Rs 30 per share on the offer price for retail individual bidders and to eligible employees.

The issue is to be made through the book-building process and will open on 01 November 2017 and close on 03 November 2017.

The net proceeds from the fresh issue will be used to augmenting the capital base to support the future growth of business and to maintain the current solvency levels.

Competitive Strengths

Market leadership and established brand: The company is in operation for almost a century since incorporation in 1919. It is the largest general insurance company in India in terms of net worth, domestic gross direct premium, the profit after tax and number of branches. It has been market leader in each such product segment, despite increasing competition from private players, and maintained market leadership in the general insurance industry in India, particularly in fire insurance, marine insurance, motor insurance and health insurance. The company issued 27.10 million policies across all product segments in FY2017, the highest among all general insurers in India.

Longstanding global footprint and successful international operations: The company commenced international operations with London branch in 1920, and has maintained operations in Japan and Australia for over 50 years. In addition to significant operations in the United Kingdom, global operations are spread across Asia Pacific, Middle East, Africa and the Caribbean. The company operated in 28 international jurisdictions through a number of international branches, agency offices, subsidiaries and associated companies end June 2017. The gross written premium from international operations contributed 14.2% of overall gross written premium, while international business recorded an underwriting profit of Rs 31 crore in FY2017. International operations and global footprint further strengthens business reputation and brand, and contributes a significant portion of premium generated.

Sustainable business model driven by customer satisfaction: The high levels of service quality, focus on customer satisfaction, sophisticated underwriting, product development and claims management capability have enabled the company to develop a sustainable business model. The claim settlement ratio in FY2017 was 90.4% (including suit claims) which is the highest among the top 10 multi-product insurers in India. The claims repudiation ratio for FY2017 was 1.2% which is the second lowest among top 10 multi-product insurers in India. The grievance disposal ratio was 99.15% in FY2017.

Diversified product offering and product innovation capability: The company offered more than 230 products across various business segments. The product portfolio is well diversified with fire contributing 15.34% of gross written premium, motor 38.81%, health 26.19%, marine 3.07%, crop 5.38% and other insurance segments 11.2% in FY2017. The company has developed strong product design, marketing and sales capabilities, and modify product offering based on regular market research on the evolving needs of wide range of customers and corporate clients.

Multi-channel distribution network: The company has developed an expansive multi-channel distribution network that includes individual and corporate agents contributing 42.01% of gross written premium, brokers 25.75%, and bancassurance partners 1.15% in FY2017. The direct sales contributed 31.09% of gross direct premium in FY2017. The distribution network included 68,389 individual agents and 16 corporate agents. The diversified distribution and sales network reduces dependence on any single distribution channel, and enables to access a wide range of customer segments across various industries, geographic regions, income groups and consumer demographics. The company has developed a pan-India office network of 2452 offices end June 2017. The company also distributes policies online, including through dedicated portals for customers, corporate, agents, development officers, as well as through common service centers and web aggregators.

Robust financial position: The company is the largest general insurance company in India in terms of net worth, domestic gross direct premium, profit after tax and number of branches. The company has funded its operations for more than 40 years without any external capital infusion. The strong financial position and capitalization enable the company to underwrite high value corporate and mega risk policies. Its net worth (excluding fair value change account) increased at a CAGR of 7% from Rs 9605 crore end March 2013 to Rs 12596 crore end March 2017 and improved to Rs 13124 crore end June 2017. Net worth including fair value change account increased at a higher CAGR of 9% during same period.

Business Strategies

Capitalize on significant market potential and increase market share: The Indian insurance industry has in recent years experienced several positive changes including liberalization of the insurance market, a supportive regulatory framework, and GoI initiatives to allow increased foreign direct investment in the insurance industry. India's lower general insurance penetration represents the significant untapped potential of the Indian general insurance market. In order to capitalize on such growth potential, the company intends to implement cost-effective expansion of operations with an increased focus on growing retail products business and increase retail market share. As a result of the increased awareness of health and other personal insurance products, the company anticipates significant growth in retail fire and health insurance product segments.

Improve underwriting profitability: The company intends to further refine its underwriting process and internal control measures to minimize errors and obtain better commercial arrangements from reinsurers.

Leverage technology to drive growth, profitability and customer satisfaction: The company continues to focus on developing and strengthening IT capabilities to support growth and improve the quality of services in an increasingly digital world. It intends to use IT infrastructure to build data driven models to improve underwriting functions, risk management, monitoring and reduction of fraud. The digitization efforts are aimed at creating a structured, cost-efficient and largely automated sales process with decreased dependence on physical infrastructure while increasing market penetration.

Continue to focus on product innovation: The company continues to undertake market assessment studies to strategically evaluate additional product offerings and intends to introduce new products in response to the changing needs of customers. The company also intends to offer certain reinsurer driven policies leveraging their knowledge of international markets, capacity and capabilities in areas where it does not currently have requisite experience.

Expand international operations: The company intends to further expand operations in additional international markets. It has recently established a representative office in Myanmar and plan to establish another international office in a Myanmar Special Economic Zone. The company has also received a license to operate a regional office in the DIFC in Dubai and is in the process of securing approvals for commencing operations in Qatar.

Weaknesses

Catastrophic events, including natural disasters, could materially increase liabilities for claims by policyholders, result in losses in investment portfolios, and have a material adverse effect on business, financial condition and results of operations. The fire, engineering, crop/weather, motor and health insurance businesses exposes to risks of liabilities for insurance claim payments relating to catastrophic events covered by insurance products of the company.

The company had a deficit in miscellaneous segment revenue account and negative net cash flows in the past and may continue to have deficit in revenue account and negative cash flows in the future.

A significant portion of business comes from working with the government which subjects the company to risks which could result in litigation, penalties and sanctions including early termination, suspension and removal from the approved panel of insurers. The outstanding premium receivable for a period greater than one year from the central or state governments was Rs 78.85 crore end June 2017.

The company cedes a significant percentage of reinsurance to GIC Re. Any adverse change in relationship with GIC Re could result in a material adverse effect on business and results of operations. In FY2017, 49.60% of reinsurance ceded was to GIC Re. For certain types of reinsurance, including crop/weather insurance, all non-life insurers in India rely largely on GIC Re.

The company relies on select types of insurance segments for most of its gross direct premium and profitability. In FY2017, the fire insurance segment contributed 12.08% of gross written premium, motor 41.06% and health 27.90%. Any constraint in selling these products due to future regulatory changes restricting or limiting the sale or marketing of these products, changes in customer preference, or if the company is unable to maintain the right portfolio mix of profitable products, could have a material adverse effect on business.

The loss reserves of the company are based on estimates as to future claims liabilities and if they prove inadequate, it could lead to further reserve additions and materially adversely affect results of operations.

The states of Maharashtra and Tamil Nadu accounted for 44.74% of the company's domestic gross direct premium in FY2017. As a significant portion of business is generated from relatively few regions, the company is susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.

Changes in market interest rates may have a material adverse effect on business and results of operations. The profitability of certain of insurance products and return on investment are particularly sensitive to interest rate fluctuations. The non-equity exposure was 44.18% of investments end June 2017.

A portion of corporate premium comes from a limited number of large clients and the loss or downsizing of any of these clients could adversely affect business, results of operation, financial condition and cash flows.

A significant proportion of reserves are for motor third-party liability, which tends to involve longer periods of time for the reporting and settlement of claims. This may increase the inherent risk and uncertainty associated with loss reserve estimates.

The aggregate contingent liabilities stood at Rs 2797.2 crore end March 2017. Any increase in or realization of contingent liabilities could have a material adverse effect on business.

Valuation

New India Assurance is the largest general insurance company in India, with 15% market share of the domestic gross direct premium. The company is market leader in all segments except crop insurance for last five straight years. The gross written premium of the company has increased at a CAGR of 15% from Rs 13200 crore in FY2013 to Rs 23230 crore in FY2017. The company has been funding its operations for more than 40 years without any external capital infusion. The company commands a healthy financial position, with a solvency ratio 2.27x end June 2017, compared to the IRDAI prescribed control level requirement of 1.50x. The operating expense ratio of the company was 20.40% in FY2017, the lowest among the top 10 multi-product insurers in India.

New India Assurance's EPS for FY2017 works out to Rs 10.52. The scrip is offered at P/E multiple 73.2 times FY2017 EPS at the lower price band and 76.1 times FY2017 EPS at the higher price band.

The post issue book value (BV) of New India Assurance is Rs 184.5 end June 2017. P/BV works out to 4.3 times at the upper price band of Rs 800 per share.

The company is the second general insurance company to list on the exchanges, after ICICI Lombard General Insurance Company listed in September 2017. ICICI Lombard General Insurance Company is currently trading at 7.9 times its book value and is available at PE multiple of 36.1 times. The incurred claim ratio of ICICI Lombard General Insurance at 80.64% and combined ratio at 104.1% for FY2017 is better than New India assurance incurred claim ratio at 92.2% and combined ratio at 119.7%.

The New India Assurance Company: Issue highlights

For Fresh Issue Offer size (in Rs crore )

- On lower price band

1848.00

- On upper price band

1920.00

Offer size (in number of share in crore)

2.40 crore

For Offer for Sale Offer size (in Rs crore)

- On lower price band

7392.00

- On upper price band

7680.00

Offer size (in number of share in crore)

9.60 crore

Price band (Rs)*

770-800

Minimum Bid Lot (in no. of shares )

18

Post issue capital (Rs crore)

412.00

Post-issue promoter & Group shareholding (%)

85.4

Issue open date

01/11/2017

Issue closed date

03/11/2017

Listing

BSE,NSE

Rating

47/100

Consolidated Statement of Revenue Accounts: New India Assurance

1303 (12)

1403 (12)

1503 (12)

1603 (12)

1703 (12)

1706 (3)

1. Premiums earned (Net)

9599.18

10994.13

13353.80

15215.02

17674.78

4768.47

2. Profit on sale of Investments (Net)

615.19

680.73

900.24

879.28

1209.85

348.49

3. Interest, Dividend & Rent - Gross

1142.82

1268.05

1457.04

1578.43

1669.00

474.45

4. Others

0.00

0.00

0.00

0.00

0.00

0.00

Total (A)

11357.19

12942.92

15711.08

17672.73

20553.62

5591.40

1. Claims Incurred (Net)

8189.18

9462.46

11262.00

13234.35

16299.82

4159.30

2. Commission

896.11

1180.20

1287.87

1412.93

1332.04

381.74

3. Operating Expenses related to Insurance Business

2303.61

2674.04

3103.85

3555.20

3817.18

869.54

4. Premium Deficiency

0.00

0.00

0.00

0.00

0.00

0.00

5. Others

0.38

13.91

6.97

3.68

5.96

2.50

Total Expenses (B)

11389.29

13330.61

15660.69

18206.15

21455.00

5413.08

Operating Profit/ Loss C=(A -B)

-32.10

-387.69

50.40

-533.42

-901.37

178.33

APPROPRIATIONS

Transfer to Shareholders' Account

32.10

387.69

-50.39

533.43

901.37

-178.33

Transfer to Catastrophe Reserve

0.00

0.00

0.00

0.00

0.00

0.00

Transfer to Other Reserves

0.00

0.00

0.00

0.00

0.00

0.00

Consolidated Statement of Profit & Loss Account: New India Assurance

1303 (12)

1403 (12)

1503 (12)

1603 (12)

1703 (12)

1706 (3)

1. Operating profit/(loss)

-32.10

-387.69

50.39

-533.43

-901.37

178.33

(a) Fire Insurance

97.86

-169.28

71.66

121.52

-167.22

38.97

(b) Marine Insurance

144.40

169.07

56.68

126.21

48.50

17.70

(c) Miscellaneous Insurance

-274.37

-387.48

-77.95

-781.15

-782.65

121.66

2. Income from investments

1060.96

1285.77

1487.92

1527.17

1656.14

431.66

3. Other income

20.11

27.25

175.00

77.82

218.41

8.15

Total (A)

1048.97

925.32

1713.31

1071.56

973.17

618.14

4. Provisions (Other than taxation)

-0.31

8.89

3.87

25.99

12.25

1.22

5. Other expenses

-34.50

-27.44

4.57

0.14

4.13

-0.38

Total (B)

-34.80

-18.56

8.43

26.12

16.38

0.83

Profit before tax

1083.77

943.88

1704.88

1045.44

956.79

617.30

Provision for taxation

169.84

138.95

327.55

115.08

116.94

103.95

Profit after tax

913.93

804.93

1377.32

930.36

839.86

513.35

Minority Interest

-11.84

-0.46

3.90

1.87

-4.42

-3.42

Share of Profit in Associate Companies

14.55

25.48

34.65

29.06

22.42

-6.40

Net Profit

940.32

830.86

1408.08

957.55

866.69

510.36

EPS (Rs) *

11.41

10.08

17.09

11.62

10.52

#

* on post-issue equity of Rs 412 crore of face value of Rs 5 each, Figures in crore, Source: Capitaline Database# EPS can not be annulised due to seasonality in business

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